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1 CHECK AGAINST DELIVERY Australian Financial Review Tax Reform Summit Wednesday, 23 September 2015 Intercontinental Hotel, Macquarie Street, Sydney Honourable Jay Weatherill MP Premier of South Australia Acknowledgements Mr Michael Stutchbury, Editor-in-Chief of the Australian Financial Review Ms Fiona Buffini, News Editor Those taking part in the upcoming Roundtable on State Taxation and the Federation, Nick Greiner, Michael Egan, Andrew Barr and Jacob Greber (GREE-ber) Ladies and gentlemen Remarks Introduction I begin by acknowledging that this land we meet on today is the traditional land of the Gadigal (GAD-ee-gul) people.

2 Good morning. It s a pleasure to open the second day of this Summit. Last week s events in Canberra have turned some aspects of politics on their head and have immediate implications for my State and for the vital topic of taxation. The prospect of working with a progressive Prime Minister who can see the possibilities for South Australia and the nation is significant. These big changes at the top have not altered the fundamental areas of reform I have been advocating for for some considerable time. What has changed, however, is that we might now have a willing Commonwealth partner to create the high-tech, value-add economy we so desperately need. And, of course, intimately related to this is the matter of tax reform, which is the purpose of this summit. 2

3 Today, I d like to talk about the principles that informed the historic tax changes we ve introduced in my State. I also want to put forward a more detailed proposal for the taxation of financial services one I first touched on at a CEDA conference, in Canberra, in June. Finally, I want to explain how this and other measures could be part of a broader taxation debate that has the potential to end the political stalemate in our nation. The health funding imperative First, though, I want to set the scene for why things must change and must change soon. We cannot lose sight of the fact that the fundamental purpose of our tax system is to raise funds for the collective purposes of our nation. The single biggest imperative for tax reform is the urgent need for Australia to address health funding. 3

4 Of all the areas in which government spends money, health is the one that will demand the most attention and careful management in the years ahead. The increasing cost of health and hospital services is more than any of the States and Territories can handle under the current tax and grant revenue regime. When we discussed this fact at the July Leaders Retreat, my colleague, Mike Baird, made a confronting presentation about the health funding gap likely to develop in the next 15 years. Show slide 1 As this slide shows, overall government health spending will rise steadily. But unless State and Territory revenues improve, those jurisdictions won t have the money to fund their proportion of the increase. Put simply, by 2030, there s going to be a funding gap of $35 billion a year. 4

5 Those who believe Australia already spends too much on health might wish to consider the next slide. Show slide 2 We need to spend every cent of our health budgets as efficiently and effectively as possible, and I m sure there s room for improvement in that area. What this shows us, however, is that Australia is by no means spending in a reckless manner there s no free lunch when it comes to health funding. Our expenditure on health is less than 10 per cent of GDP. Many OECD countries spend much more than us, and the United States is right up there at 17 per cent. Tax revenues are low So, what is the revenue context? 5

6 There s been talk recently especially from the Federal Government about the need to address our dire budget situation through harsh spending cuts. Governments must, of course, act prudently with public money. But Australia fundamentally has a revenue problem, not a spending problem. Show slide 3 As this slide shows, revenues collected by Commonwealth and State governments today are low compared with revenues collected in the past 15 years. The gap between represents about $24 billion. Calls for tax cuts must be seen in this context. And they must be seen in light of the fact that all government budgets are under pressure especially in the face of community demands. 6

7 The demands of everyday Australians are simple. They want: secure, well-paid jobs; good schools and hospitals; a home in which to raise a family; and adequate support as they age. They want and should reasonably expect a tax system that is designed and can be adapted to raise sufficient funds to meet those needs. Those of us in the policymaking and politics business have a responsibility to work together to create that system. But I do accept we must raise that taxation in a way that encourages growth and prosperity. In South Australia, we don t just talk about this we act on it. 7

8 What SA has done Early in 2015, my Government embarked on a short but comprehensive review of our State tax system. We released a Discussion Paper to foster the direct involvement of South Australians, and we held a series of public forums. My Treasurer, Tom Koutsantonis, travelled across the State. He spoke to groups both large and small to people in town halls, in boardrooms and at kitchen tables. And he shared with them high-quality data about every aspect of our State taxation system. Our review was guided by certain principles principles that can be applied to all such efforts, irrespective of the jurisdiction. For example, we said from day one that every aspect of our system was on the table and that no sensible suggestion would be ignored. 8

9 Also, the review began without having a predetermined outcome in mind an approach that observers variously saw as refreshing or courageous in the Yes, Minister sense of the word. Our other touchstone was the need to create a system that was free of inefficiencies, rewarded effort and encouraged rather than hindered economic activity. We also promoted equity the burden should not fall on those who can least afford it. Once our tax review was completed, we decided to implement sweeping changes and made them the centrepiece of our 18 June State Budget. Let me tell you the headline elements of the tax changes incorporated in that Budget: a total of five taxes will be abolished with some going on Budget day this year; stamp duty on share transfers ended immediately; 9

10 stamp duty on non-residential real property transfers will be phased out and once this is done we ll be the only State not to charge this levy; a total of about $670 million in tax reductions will be provided over the next four years; a payroll tax rebate for small business will be extended for the coming financial year; businesses will continue to enjoy the most competitive payroll tax regime in the nation; employers will save nearly $180 million a year from changes to the WorkCover scheme; and a series of new concessions, protecting low-income earners, were also introduced. The upshot of our review and reform process is that once all measures are implemented we will go from being the highest to the lowest taxing State in the nation. 10

11 A bright, shining opportunity I d like to move back to the national scene and discuss options for tax reform options I believe can open up now as a result of the ascension of Malcolm Turnbull. The arrival of a new Prime Minister and Cabinet represents to me a terrific opportunity for us to look at tax reform with more open minds. Mr Turnbull has said Australia needs a new style of leadership one that understands and communicates the economic challenges and opportunities we face. He described it as: a style of leadership that respects the people s intelligence, that explains these complex issues, and then sets out the course of action we believe we should take and makes a case for it. I look forward to the Prime Minister applying this thinking to many topics and especially to tax. 11

12 Consistent with the approach, I think all options and issues should be up for discussion. And by this I mean the rate and scope of the GST, the Medicare levy, the taxation treatment of superannuation and corporate tax evasion. This is essential because we might not be able to address the kind of funding gap I mentioned at the start with the GST alone. A different and better GST Show slide 4 As this slide suggests, the performance of the GST has been a disappointment despite being sold as a growth tax. This shows that the GST was keeping pace in the years up 2006, though its performance was masked by the historically low savings ratio. 12

13 Once that savings ratio bounced back, the difference between household incomes and GST revenues became obvious and stark. The GST hasn t kept pace structurally with national income, and it has been more volatile than consumer spending and household income. Its poor performance accounts for a significant part ($12 billion) of the projected $35 billion gap I highlighted earlier. And it certainly hasn t yielded the rivers of gold some were expecting. Extending the GST base would structurally strengthen it, but there are significant equity aspects to consider. Expanding its coverage to fresh food offers little revenue benefit and comes with significant equity concerns. Widening the GST to private health spending, health insurance and education offers a significant revenue benefit, given the strong growth in expenditure in these sectors. 13

14 But special compensation measures in relation to the Medicare and pharmaceutical subsidy systems would need to be considered. South Australia is willing to consider Mike Baird s proposal to increase the rate of the GST provided there s adequate compensation. As for adjusting the Medicare levy which rises with incomes such a move has the advantage of requiring less compensation than a GST change because of its inbuilt exemptions. It might also be more amenable to scheduled step increases over time in response to the growing healthfunding gap. However, a very large increase in the Medicare levy would be necessary to raise the $35 billion needed. The political context Creating an environment in which we can constructively talk about these matters is a political task. 14

15 Unfortunately, the tax debate has narrowed. The Coalition has previously ruled out discussion of superannuation tax reform and the ALP at the national level has done the same in regard to the GST. This seriously limits the scope of what s possible. It limits the capacity to address health care funding, as well as other reform imperatives. As we saw with the PWC work published in the Australian Financial Review on Monday, lifting the GST to 15 per cent, while compensating households with incomes of up to $100,000, raises $24.5 billion of the $35 billion required. This leaves no scope for Federation reforms directed at raising productivity or broader tax reform, such as those who advocate for reducing the corporate tax rate. If we want a genuine national resolution to health funding and national economic growth, we need the broadest possible tax debate. 15

16 In the same way, any discussion of the GST should not be limited to its rate it should also cover its scope. A financial-services tax One possible area of increasing the scope of the GST that deserves closer scrutiny is the application of GST to the consumption of financial services. This is something I flagged in a speech to CEDA in June and at the National Press Club in July. There s a gap in financial-sector taxation in Australia and this was pointed out by both the Henry tax review and the Murray financial-system inquiry. The GST presently doesn t apply fully to banking services. This is not because of social policy or equity concerns. Such concerns are relevant for food and health, but not for banking services. 16

17 As the NATSEM work my Government commissioned early this year reveals, the taxation of financial services is progressive. Treasury estimates that the potential revenue gain from the full taxation of household consumption of financial services would be $3 billion to $4 billion in My Government has commissioned some further work on this topic, and I d like to share some insights from that work with you. There are overseas examples of governments seeking to close tax gaps or generate revenue more generally from financial services. These include selective payroll taxes in France and Denmark, and a supplementary tax on wages and profits of financial institutions in Israel. Our work in South Australia suggests an alternative approach a supplementary tax that is applied to the margins earned on lending and other activities that derive their income by means of spreads or margins. 17

18 That is a tax equivalent to a GST on the value that is added, but not presently captured, by the invoice credit system GST. In practical terms, the tax would apply to the margin between the rates charged by financial institutions and the rates at which they borrow. This is similar, for example, to the current GST treatment of gambling, which taxes the difference between the bets placed with gambling operators and the payouts they make. There are questions to be resolved with this model, including how or whether adjustments might be made to exclude business banking. But bringing in a supplementary tax on all interest margin income would still advance the efficiency of the tax system, as well as its equity. Such a financial-sector tax would need to be operated in a nationally integrated way with a single tax rate and base to avoid interstate tax leakage. 18

19 For administrative simplicity, the tax could be collected through a national collection arrangement, and the revenues distributed per capita to each State. Consistent with the need to keep all options on the table and for politicians to explain complex issues and make the case for change the possibility of closing the financesector tax gap should not be ruled out. I m prepared to have my proposal scrutinised by the Australian Tax Office, State and Federal Treasury experts, and, of course, the finance sector. I m enough of a realist to know that the first instinct of the major banks will be to reject it. But before you shed a tear for the banks, let s not forget, for example, that, in August, the Commonwealth Bank announced a full-year net profit of $9 billion for And, in May, the other members of the big four Westpac, ANZ and NAB each announced half-yearly profits in the vicinity of $3.5 billion. 19

20 Conclusion Ladies and gentlemen. I m under no illusions about the difficulty of the task that lies before us when it comes to tax reform. Balancing the interests of State, Territories and Commonwealth governments that all want the GST for different things is not easy. And working up the collective courage to get past our reflexive aversion to increasing tax revenues is also not easy. Nevertheless, I m optimistic about Australia s ability to realistically weigh up its choices and to bring about lasting change. I talked to the Prime Minister last Friday. And I have to say I m encouraged by his positive and open-minded approach his focus on solutions, not problems. 20

21 We today have within our sights the potential to strike a grand bargain an agreement that anticipates the looming funding gap in areas like health and institutes a revamped tax system that serves the national good for the long term. This agreement can be accompanied by reform that encourages innovation and productivity growth. It can encourage all levels of government to abolish taxes that punish economic activity. And it can redesign the Federal taxation system. I commend the Australian Financial Review for convening this summit, and I wish you all the best for today s discussions. Thank you. 21

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